People Patterns uses Behavioural Economics as a new source of advantage for innovative businesses. Email me bri@peoplepatterns.com.au to unlock the secrets of consumer behaviour for your business or follow the latest on Twitter @peoplepatterns.

Tuesday, August 30, 2011

Debating whether you should introduce a fee of some kind to cover a service you provide? There are obvious financial advantages to your bottom line, but is it worth the negative reaction you may get from customers? Here are three behavioural principles that will help you consider your options.

Social contract

Charging for something shifts it from social to commercial transaction, and this means that the service will be viewed differently. In a case study profiled in “Predictably Irrational” by Dan Ariely, a childcare center imposed a fee on parents who were late in collecting their child. Sounds like a sensible idea, motivating those parents prone to tardiness to make more of an effort to get there on time.But what happened? Tardiness became worse!Why? Parents felt less guilty about being late because they were now “paying” for it.The arrangement had shifted from a social to financial transaction, and expectations shifted in kind.In your business, take note of how social norms are influencing the behaviour of your customers before you shift it to entitlement territory.

Adaptation

We adapt to something faster if we are not interrupted and reminded about it (think ‘quick like a Bandaid’).By introducing a service fee you will be drawing attention to that service every time you charge for it.If it’s great service, it can be a good move to charge every time so that you can showcase the value and prevent customers taking it for granted (adapting to it). But if your service is not that hot or not easily understood, better the charge is either infrequent (like annual) or deemphasised (don’t provide long-winded explanations on every bill) so that customers have a chance to forget about it after initially being annoyed.

Loss aversion

The power of fees is often in what you do not charge.“We’ll waive normal joining fees” or “We’ve scrapped fees” are popular techniques amongst banks and gyms because they placate our aversion to loss – we feel like winners because we’ve avoided the pain of a fee.For the reason alone of customer motivation it is worth having some sort of fee that you can waive as you need.

From your own experience as a consumer it should come as no surprise that service fees are often resented.The opportunity for your business is to know how and why you can use fees to influence customer outcomes and overcome potential resentment, and to proceed knowing that it’s not as simple as cost recovery.Until next time, happy charging.

Monday, August 22, 2011

This weekend I visited a café famous for being one of the first to bring real coffee to Melbourne.But in my estimation, that business is surviving on its heritage alone. Both the product and, more strikingly, the service left a lot to be desired. A sneering barista who barely grunted to acknowledge our orders and practically threw change at my friend made us feel that we were not living up to his expectations.Needless to say, I won’t be back.This got me thinking about five principles of Behavioural Economics that can help businesses (well, at least, those who think customer retention is important), improve areas of poor customer service.

Framing

In Behavioural Economics framing refers to the language and context you use when interacting with a customer.It has been shown that using language like “can’t”, “won’t” and “that’s our policy” inflames the customer experience.Offering to “take you through the steps…” is much more constructive than “you can’t do that before you do this” because you have framed it in the affirmative.

Drop in the Bucket Effect

In environments like call centres where the sheer volume of customer inquiries can be overwhelming, it can be difficult for your staff to feel they can make a difference – the drop in the bucket effect.The knack is to think of the one rather than the many.Metrics like “How many customers you helped” is better at motivating staff than measurements like call handling time because it takes performance back to the one-to-one relationship.Likewise, celebrate the success stories where a staff member has helped a customer – noting it doesn’t have to always be ‘going above and beyond’, it should be the goal of every interaction.

Procedural Fairness

We cope better with outcomes when we feel that we have been treated fairly through the process. To this end, inform your customers of the process that will be used to evaluate their request to help them understand what happens and why.“I’ll have to speak with my manager” is not as effective as setting up the interaction by outlining the steps and escalation points. “Just before I ask you to go into detail about your concern, I would like to explain my role in this process.I will…then…and finally…Do you have any questions before we start?”

Uniqueness

Just as we cope better when we know what the evaluation process will be, we also want to be treated as unique individuals. As Dan Arielywrites in Predictably Irrational, we have a “need for uniqueness”.But whilst of course we are not unique in thinking we are unique (we all do), the lesson here is never to tell a customer they are one of many because that will diminish their sense of individuality. “My issue”… “My situation”. I once had a spat with my car manufacturer because they were interested in their policy whereas I was interested in the inconvenience the car break down meant to my life.

Endowment effect

The endowment effect means we tend to overvalue what we own.That’s why you think your car is worth more on trade-in than the dealer. In a customer service setting, this can help explain why customers can be all consumed by their issue, which to your organisation may seem trivial. Again in my car manufacturer’s case, they saw my car breakdown as an isolated issue to be resolved through their usual process. I saw it as a failed new car purchase that stranded me for a whole weekend.To deal with this you need to see the issue from the customer’s perspective and work with them to understand what it would take to have the concern resolved.

Customer service undoubtedly one of the trickiest areas of business management.The good news? Whilst the challenge of balancing your organisation’s policies, procedures and resourcing with the expectations of individual customers seems to be in constant flux, there actually consistent and predictable behavioural reasons why customers react in the way they do. An understanding of Behavioural Economics can mean more effective, efficient and satisfying customer service models, so why not get started?Until next time, happy serving.

Monday, August 15, 2011

Two fliers dropped into my letter box captured my attention recently because they were advertising new ways of thinking about existing business models.

The first was a flier forDrivers on Scoot. As their leaflet probes..."Had a little too much to drink and need to get home safely with your car?" Ah ha! A solution to the vexed issue that compounds big-night out regret - having to get your car the next day. The system involves four steps. 1. you make a booking 2. a driver meets you at the agreed time 3. the driver folds the motorised scooter they used to get to you into a bag and slips it in your car boot, and 4. they drive you and your car safely home. The driver then trundles off on their scooter to the next appointment..

Why did I think this business was interesting? It challenges the conventional thinking around how to get you and your car home (most typically a taxi home and then a logistical negotiation the following day to collect the vehicle). Promoted as cheaper than a two-way taxi trip, Drivers on Scoot have attempted to resolve a common issue for people based on these insights: control and convenience. Control because leaving your car means you cannot control what happens to it, and convenience because you do not have to waste time the following day reclaiming your vehicle.

The second flier I received was for Coles Click & Collect. This is a new service model that Coles have introduced in Windsor, Victoria whereby you order your groceries online, but instead of having them delivered they are hand packed and you collect them at a service station depot with fancy secured fridges. It's the "new express way to shop" according to the brochure.

Why did I think this was interesting? Coles are tackling a problem that I myself have experienced with online shopping - I simply do not want to commit to being at home for the 3 hour delivery window on a particular day. But I would happily shop online if I had control over when I could collect the goods. Have you noticed that control and convenience have reared their heads again? Control because I have control over when I collect the groceries and convenience because it fits in with my plans.

So have I tried either system? Well, no. I have been too well behaved to need the services of Drivers on Scoot (plus I think they need to target the spontaneous after-work drinks crowd rather than planned-nights out crowd). And for Coles, I do not travel through Windsor and so would need to wait for the service to be offered locally.

But what's interesting is that both Drivers on Scoot and Coles Click & Collect are based around control and convenience. They have crafted business models based on fitting in with the lifestyle of the customer. Here's the opportunity for your business: look for the problems that your customers are grappling with to get stuff done. A problem related to having a few drinks? Getting your car home. A problem with online shopping? Being home when the delivery is scheduled. Looking beyond your usual assumptions may give rise to a new thinking about your business, so give it a shot. I look forward to seeing your flier in my mailbox soon.

Tuesday, August 9, 2011

With all the action on the stock market over the last few days, I thought it would be an opportune time to look at the behavioural aspects of share trading.

As Jonah Lehrer reminds us in his book "How We Decide”, the stock market is “a classic example of a random system. This means that the past movement of any particular stock cannot be used to predict its future movement” (p 67 “How We Decide”, 2009). And yet we delude ourselves into thinking we can see patterns of growth – a bit like contestants on the TV game show Deal or No Deal who think they can analyse which suitcase holds the prize.

Lehrer cites a study by neuroscientist Read Montague which had participants play the stock market.Unbeknownst to the subjects, the simulated market used real data from real-life market bubbles and crashes such as the Dow of 1929, the Nasdaq of 1998, the Nikkei of 1986 and the S&P 500 of 1987.

Montague found when the simulated market was in decline “people just can’t wait to get out, because the brain doesn’t want to regret staying in”.Panic sets in as people realise that their brain has tricked them into thinking they could see patterns in a random system.We are then driven by our fear of what we may lose and tend to act more impulsively rather than perhaps taking a longer term view.

Leher also profiles work undertaken by Thierry Post, a behavioural economist, who led a team analyzing Deal or No Deal.They found that once a contestant’s available options are weakened and they start receiving smaller and smaller bank offers to ‘deal’, they tend to become more risk-prone, rejecting offers that reasonable.The brain doesn’t get over the ‘loss’ of earlier, higher deal offers and so thwarts our rational assessment of the current deal proposed. The contestant digs in and plays out the game to a diminished return, lamenting what might have been.Here, rather than cashing in, the contestant holds on too long.

So in both cases, our fear of loss - our loss aversion - is what drives our decision making.In the market study, panic set in because people began to fear what they may lose, and this suggests we can sell out too early. In the Deal or No Deal examination, contestants could not get beyond what they felt they had already lost, holding on too long. This suggests we may not sell early enough.So what’s the right answer?

The right answer is to understand why you are making the decision you are.If you are selling because you fear how low the share price may fall, understand that loss aversion is driving your analysis rather than an objective assessment of the company’s performance. If you are holding on to shares just because you are angry that they used to be priced higher and you cannot bear to take a loss, consider that you may be blinding yourself to the most financial reasonable course of action, taking the deal.

As always, if you have an issue for which you would like a Behavioural Economics perspective, simply email me at peoplepatterns@gmail.com. Until next time, happy trading.

Tuesday, August 2, 2011

Imagine you are a business leader who has just experienced the workplace equivalent of Melbourne Football Club’s humiliating failure to perform to expectation. In the AFL club’s case, they were thrashed by 186 points by Geelong and the coach has been sacked.In your case, you may have screwed up a key contract, botched a product release, missed the deal of a lifetime, or blown your operational budget.Whilst many factors may have contributed to your failure, chances are that confirmation bias may have been part of the problem.

The perils of confirmation bias

Once we have formed a view, we are prone to look for evidence that supports rather than contradicts that position. It's a bit like looking in the mirror rather than out of the window. You’ll find that data will be construed to support your side of the argument whilst new, unsupportive information is ignored. It is the ultimate “yes man” situation where you surround yourself with “yes” data.

You can see this playing out with the climate change debate, where even the same source of data (for instance Professor Garnaut’s report ) has been construed by both the Federal Government and Opposition to apply to their climate change policy positions.

Weak spots for confirmation bias

Look out for confirmation bias when commissioning, structuring and then applying market research to your business idea because a key reason for product business model failures lies in this tendency to use data to support whatever position we held initially.

Likewise be careful of confirmation bias when interpreting customer feedback as you may tend to agree with or dispute their claims based on your own views.

Recruitment and staff appraisals are another fertile ground for confirmation bias.If you’ve heard of the halo effect, you’ll know that we tend to ascribe a positive bias towards people who have previously been successful to the extent that we can overlook subsequent failures.Same goes for negative biases where we may look for confirmation of incompetence, seeing every problem that person and ignore evidence of their successes.

How to counter confirmation bias?

Two things. First, independence.Seek out parties that are not directly invested in the outcome and use them as a sense check.If you are within a larger organisation, this will mean involving business units from other market areas. If you have a market research team, they should be filling this role for you. Likewise HR. If you are in a smaller organisation, use your peer network to vet your ideas.

Second, objective criteria.If you cannot engage independent parties, or even if you do, establishing objective criteria before you launch into analysing the worth of the project is essential to counteract confirmation bias.This is why having a pre-determined interview guide for recruitment is a good move. But remember, it is the substantiation of the criteria that most prone to bias. What do I mean?Say one of your criteria for a product launch is achievement of 2% growth of the mobile handset market.How you define the market and what industry sources you choose to supply the data are both points at which confirmation bias can rear its head, so don’t trick yourself by choosing the most supportive measure.

Confirmation bias is an inherent behaviour, so understanding your own tendency to censor contradictory information is an important part of making better decisions. Mitigating this bias takes courage, discipline and awareness, but the payoff is broader thinking and through that, reduced risk of failure.Happy bias beating.

About Me

Hi! I'm Bri Williams and I run People Patterns, a consultancy specialising in buyer behaviour. I deliver benefits to you by tweaking the interactions you have with your buyers through the application of behavioural science. A marketer and consumer behaviouralist, I've worked across industries for over 15 years, am a specialist contributor to Smartcompany.com.au, facilitator, speaker and author. Contact me at bri@peoplepatterns.com.au to find out how to get your buyers to buy more.

Services available from People Patterns

People Patterns is about businesses getting their buyers to buy more through the application of proven techniques from behavioural sciences such as behavioural economics. By knowing the patterns, you can take the guess work out. Thin of it like "Magician's Secrets finally revealed", but for buyer behaviour!

Contact me via bri@peoplepatterns.com.au or 0408 392 173 to find out about what a difference this new perspective can bring. An obligation free chat could be the best thing you do for your business this year!